WeWork landlords could see steep losses on any rejected leases in bankruptcy

The company has been under fire since before the pandemic hit, which caused demand for office space to further freeze up. It lost an estimated $15 billion since the end of 2017, according to a New York Times tally as of September. A month earlier, WeWork reported having substantial doubt about its ability to stay in business.

In a bid to salvage a business it came to dominate, the cash-burning company began slashing its leasing obligations after its botched initial public offering in 2019, with negotiations with landlords eventually saving the company $12.7 billion on lease expenses.

Now, a bankruptcy filing could force the hand of holdout landlords that it owes $25 billion in outstanding leases, according to Evan DuFaux, a special situations analyst at CreditSights, who earlier this year warned that a balance-sheet recapitalization would buy WeWork only so much time.

“The recapitalization this spring provided the company an additional two quarters of liquidity, but it didn’t solve the fundamental problems underlying its operations,” DuFaux told MarketWatch.

WeWork’s main problem has been that it rents out desk space short-term, but has long-term leases at top market rates that average 15 years, with landlords spread across hundreds of locations in the U.S. and abroad. It has yet to become a consistently profitable business.

The company reported about $680 million of liquidity as of late June. Then in October, it withheld interest payments on some bonds with coupons of 11% to 15%. By Tuesday, it said it had reached a seven-day forbearance agreement with bondholders.

“In a bankruptcy, I’d expect the company to reject many of its leases, but to keep enough leases in profitable locations to continue to operate, hopefully as a profitable company, after a reorganization,” DuFaux said.

Another possibility is that a liquidation could wipe out a historic volume of office leases in one fell swoop, further pressuring an already distressed U.S. office market. Retailer Bed Bath & Beyond’s bankruptcy earlier this year ended in a wind-down and liquidation.

WeWork also could be sold, but finding a buyer could be tough, as its office-share rivals Regus and Knotel have already gone bankrupt.

A spokeswomen said WeWork doesn’t “comment on speculation” when asked a potential bankruptcy filing. She did say the forbearance agreement provides time for it to continue “positive conversations” with key financial stakeholders.

“I don’t see a way this works out for WeWork or the landlords,” said Shlomo Chopp, a commercial real-estate restructuring expert and bond buyer at Terra Strategies, about any WeWork bankruptcy.

“Sometimes landlords aren’t even in control of a property anymore and lenders are in place,” Chopp said. “I don’t see anything good coming out of it.” 

WeWork’s new chief executive, David Tolley, said in September the company would be looking to renegotiate nearly all of its leases, a process that can take longer than in a bankruptcy situation. Tolly is widely viewed as a corporate restructuring specialist, previously overseeing the overhaul of Intelsat S.A. as it emerged from bankruptcy with less than half its original debt , after his prior stint in private equity.

“The cool thing about leases is that you can do some funky stuff as a debtor in a bankruptcy,” said Isaac Marcushamer, partner and co-founder of DGIM Law, which specializes in restructurings. “You can say, ‘Hey, I don’t want to have this lease anymore,’ walk away and the landlord can have it back.”

For long-term leases, that can mean a landlord might only hope to recoup a fraction of the total lease amount owed. “That’s the kind of power that exists,” Marcushamer said.

In the past, if a lease was rejected in a bankruptcy case, it might open a pathway for a landlord to collect more rent from a new tenant. But leasing activity in many cities has remained sluggish in the wake of the COVID crisis, given the resilience of flexible work, the Federal Reserve’s interest-rate hikes and an avalanche of debt coming due.

Related: Dirt cheap: Distressed office buildings likely to fetch only cost of land, Barclays says

Rocco Cavaliere, vice chair of bankruptcy and corporate restructurings at law firm Tarter Krinsky & Drogin, said a debtor only needs to show it is exercising businesses judgment when it is rejecting a lease, once it files for bankruptcy.

“It’s a standard that is fairly easy to meet,” he said.

The process also can speed up a reorganization. Should WeWork file for bankruptcy, it would need to reject or assume its leases in a seven-month window, he said.

Another factor at play is that debtors also need to have enough cash on hand to pay their lawyers, fees and to keep current on ongoing operating expenses during a bankruptcy.

“There is such a thing as going too broke to go bankrupt,” Marcushamer said.